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What I Learnt At Two Value Investing Meets

I attended a couple of interesting meets, consisting of a number of value investors, over at Delhi. They were two separate groups – "Perfect Research" and "InvestmentSuperGrowth" which met, but there seemed to be a significant overlap.

Note: I am a beginner at this "value" investor concept.

Let’s get to the interesting stuff.

Mistakes

First, a presentation by Sanjay Bakshi, a famous value investor and Professor at MDI Gurgaon. He spoke about a few mental habits to get killed in the stock market. He’s a value person so he abhors trading; there was a time when I would find that view silly because it ignores the excellent returns traders have made. But now I think everyone should be allowed their biases, and if hating trading is what makes him a better investor, more power to him.

He mentioned a great example of how our mind plays tricks on us. If you were in a shop for a lamp costing Rs. 10,000 rupees, and the salesperson said, "Listen, we have another store that we’re shutting down, just a mile down the road, and the same lamp’s available at Rs. 9,000". Will you go?

Many of us in the audience, including the stingy me, raised our hand.

Then he asked if we were buying a car for Rs. 10,00,000 (10 lakhs). And the salesperson said you could get the same car at another showroom for Rs. 9,99,000. Will you go?

I sheepishly raised my hand, because when I recently negotiated a deal for a car for someone else, we went through various, perhaps unnecessary hoops to save about Rs. 1,500. But I was the minority – a substantial number of earlier hand-raisers didn’t.

The result was interesting – we wouldn’t do the same amount of work for the exact same amount saved, because Rs. 1000 is a big portion of the Rs. 10,000 lamp, but not much of it for a 10 lakh car. We use mental accounting to screw ourselves out of what we don’t want to be screwed out of.

(Some of you will ask: Why is a value investor buying a bloody lamp for Rs. 10,000? And can I sell him a lot of lamps? Will he buy a bridge? These are very good questions. But you are thinking like a trader. Long term lessons, boys. [and girls] )

The concept causes us to undervalue what we paid lesser for. So if we own two stocks, one of which we paid Rs. 100 for and the other, Rs. 150, and both of them were at 140, we’d choose to sell the first one just because of our mental accounting of a profit. This concurs with my point of forgetting what you bought a stock at – you must imagine that the stock is sold every day and bought back at the same price.

More: We jump to conclusions fast, and overweigh recent data. Crude’s up, we must sell BPCL. Sugar is down so we have to sell sugar stocks. We ignore that these are cyclicals and will go up and down, and when it’s down, it’s probably time to buy. Buy Reliance Power, because Power is a big problem in India. Wait, that was three years ago. Uhem.

Once we come to a conclusion we look for evidence to support it. Edelweiss is going to hold the RPOWER share price boss, I was told in 2008. Obviously this argument was useful for people who had bought Reliance Power at the time.

Crude Correlations

Next came a presentation on crude, which was interesting in that it said something like every $1 of crude involved a 0.06% increase in our fiscal deficit. That’s not including currency changes or that we could pass on the costs forward.

I’m a little skeptical of seemingly independent factorization of crude prices. At some point everything gets correlated. There is something called accelerated correlation where, in tough circumstances, what is otherwise uncorrelated becomes so and that makes it even more so. Take housing prices, in the US – there is no reason to assume that because house prices in California fall, that housing prices in New York will. But as prices fell faster, they indirectly impacted credit, which created desperate sales everywhere else, and then just the fact that prices everywhere were falling made them fall some more. If crude went up like mad, you can bet that we will change our behaviour and change the concept of oil subsidies dramatically.

The Value of Cash

Another intelligent value investor came in and said that sitting on cash is important – he sat on cash for a long time, and then when recently an opportunity came, boom, he could take it. Sorta like Warren Buffett could invest in the crisis because he was the only person with some cash.

An argument then ensued with a person who I think was a broker. He said only one thing – Buffett has insurance float, what do I have? Once I’m invested, I have no cash! Even if I sat on cash, and held on, I get a juicy opportunity and I’m back in the market – no more cash. So how does that sit-on-cash concept work for those of us who don’t own an insurance business? He has a point: cash flow is important, and perhaps just as important when you make an investing decision.

Another thing the same guy said was "Teji mein research ki zaroorat nahi hoti, mandi mein kaam nahi aati". (In a bull market there is no need for research, and in a bear market it doesn’t work)

Analysis Paralysis

Neeraj Marathe then talked about how analysts get exposed to bias because they made a buy recommendation and now they won’t roll it back even in case of adverse data. Analysts sometimes refuse to even listen to opposite views.

Two ideas that were discussed were:

DISA India

A BSE-only stock that’s Bangalore based, a foundry/forging unit, where promoters hold nearly 75% and there’s another 12% bought in an open offer under escrow because of SEBI objections. The stock may be delisted and that’s a play, they say. It trades an average of just 300 shares a day at 1334 so be very very very careful.

Noida Toll Bridge

This is a value investor favourite. There’s a road. Between Noida and Delhi. There is some land around it. The cars on the road pay toll. The company has some 30 years of money-sharing agreement. So you can extrapolate number of cars on the road, ability to increase toll rates, potential land value, revenue sharing with the government and all that, put it in an excel sheet and value the company’s future cash flow.

I personally think there is too much in flux, and all negotiated agreements can be changed, because that’s the way our country is. But the group’s arguments against it went: there is just one road. Alternatives currently exist and can be built. The metro is a pain in the butt for price increases. There is the Mayawati factor. Land banks are a joke. Neeraj pointed out another point that the CEO is paid Rs. 4 cr. apparently for doing nothing (since they don’t have anything beyond that one road) and there is some behind-the-scenes manipulation of the interest rates going on with it’s own parent, IL&FS – debt to the parent went down, and interest paid went up substantially at the same time.

I see a lot of value investing threads about this company. All I can say is that they finally figured out how to sell a bridge to someone.

This is the end

There was good chai. And some excellent people. And one day I’ll expand on each of the above thoughts. But for now, there are no more paragraphs.

  • Soham Das says:

    >"Teji mein research ki zaroorat nahi hoti, mandi mein kaam nahi aati".

    "Kitna bhi research kar lo, ultimately insider news ke bina kuch nahin chalta"

    These kind of statements are precisely the psychology of average investor to stonewall themselves into sloth. Its foolish to think, and believe that in bull market everything goes up. Tell that to infra cos. Or for that matter, irrespective of what you buy in a bear market, it will go down.(eg Hero Honda in November 08)

    The crux is, you can't beat hardwork, whether you are a trader(serious traders do a lot of mental hardwork) or an ivestory; but its hidden under pithy sayings of "Teji mein zaroorat nahin, aur mandi mein kaam nahin"

  • Anonymous says:

    >Good point Soham. It aligns with the fatalistic mindset that we Indians have.

  • Anonymous says:

    >link of sanjay bakshi takes me to some budget related link in market vision. Is it intentional or mistake ?

    Samarth

  • PersonalFN says:

    >link of sanjay bakshi, is working fine. Excellent post Deepak.
    We often crib about how promoters and managements of Indian listed companies never think of minority shareholders, take minority shareholders for a ride, think only of enriching themselves, etc.

  • Anonymous says:

    >fwiw, people don't talk much about value investing beyond individual companies. I'm sure people know this, but it took me a while to look across asset classes using the value investing mindset. Mohnish Pabrai's straightforward book called Dhandho investor spoke about how Patels used downturns to get into the hotel business using the value/distressed asset approach and ultimately dominated the hotel business in the US. I suppose its easier to identify value for cyclicals like hotels. It is still difficult though because you need to have guts to leverage up (buy a leveraged company that will survive because it will bounce back the hardest) during a downturn – easier said than done.

    Also, I find it easier to identify value on a relative basis for countries/commodities/bonds vs stocks/real estate vs stocks/distressed or special situation opportunities/stocks vs bonds, etc. I haven't had luck with using the value investing approach on individual stocks – there is too much idiosyncratic risk, it takes too much time to study a company and then a company can go do a stupid thing like an bad acquisition or bad merger and its stock can fall 10% in a day. It takes a lot of patience that I have just not been able to muster. Still working on that! 🙂

  • Anonymous says:

    >Btw, another application of value investing that people don't talk about much is on the short side. Mike Burry and Paulson did essentially a value investing job (the analysis is almost the same) in identifying cheap CDS for shorting the housing maarket. Even if they were wrong they would lose little and the CDS had a lot of "value" and margin of safety.